CFM11007 - Understanding derivative contracts: introduction

Introduction to the guidance

Finance Act 2002 radically changed the way in which derivative contracts held by companies are taxed. The new rules apply to company accounting periods commencing on or after 1 October 2002.

The provisions in FA 1994 for taxing profits or gains made by companies on currency contracts, interest-rate contracts and debt contracts were repealed by FA 2002. If you are concerned with accounting periods commencing before 1 October 2002 you will find guidance on the FA 1994 financial instruments legislation that previously applied at CT13240+.

This section of the manual explains the commercial and accounting background to the use of derivatives and the FA 2002 tax rules. The guidance is organised as follows:

• Understanding derivative contracts ( CFM11005+) explains what derivative contracts are and how companies use them to hedge risk.
• Accounting for derivative contracts ( CFM12000+) looks at the accounting standards that apply to derivatives and the entries you are likely to see in company accounts.
• Taxing derivative contracts ( CFM13050+) explains the changes introduced by FA 2002 for the taxation of derivative contracts. The scope of the provisions and the basic rules are at CFM13100+, while CFM13600+ deals with special rules for situations which you are likely to meet less frequently.